As compared to currency, gold is the real wealth. Many scholars have pointed out the benefits of gold in fighting inflation. In times of uncertainty, people turn to gold to hedge their savings against financial disasters. The upward rally of gold in the past few decades is a testament to the fact that people still consider gold to be the best investment vehicle in dire economic times.
But does it really deserve this title? Is gold really the perfect choice for investors in times of economic uncertainty?
In the following paragraphs, we will explore whether gold is the perfect option for investors to hedge their savings. We will also discuss the risk of gold and the importance of rebalancing your gold portfolio.
Gold as a Hedge against Inflation
Gold has certain distinct values that make it the perfect investment option for investors especially in times of economic uncertainties. Generally, gold provides stable returns to the investors. In the last two decades, for instance, the return of gold has been effective in beating out inflation. In contrast to the paper currency, Gold has not only retained its value but also experienced an increase.
Due to inflation, the paper currency loses its value with the passage of time. This becomes clear when you compare the purchasing power of dollar today with what it was three decades ago.
In 1984, the average gold price was about $365 per ounce. Fast forward to May 2014, and the price of gold stood at $1,290 per ounce. That’s a phenomenal increase of 253% in just three decades. If we account for inflation, the value of $365 is equivalent to about $795 today. This means that the value of gold has seen a 62% increase in value. Clearly, the real value of gold has not only matched the inflation rate but also exceeded it to a great extent.
Relative to gold, the paper currencies lose their purchasing power with time. This is due to the fact that an increase in prices of goods decreases the value of the currency. Gold, on the other hand, not only maintains its value but increases with the passage of time.
Risk of Gold Investment
Although gold is an excellent hedge against inflation, there are certain risks attached with gold investment that you should know. Gold, like any other commodity, is subject to speculative rise and fall of prices. Although the price swings are not as extreme as seen in stock prices, but they are present. This calls for a little caution on part of the investors. You should be ready to adjust your gold portfolio according to its price performance.
Generally, you should aim to sell a certain percentage of your gold portfolio at their peak demand i.e. right before the gold value starts to fall. But, how can you predict when the price is about to fall?
This is where your intuition and insight about gold prices should come into play. Various research studies have proven that the value of gold rises when the economy is in weak condition and also the dollar is losing its worth. The opposite happens when the economy is booming and the value of dollar is rising.
Gold neither pays dividends, nor interests. Despite of this fact there is a general increase in the value of gold that protects the saving of investor. Gold is an ideal diversifier for a stock portfolio. It is one of the most negatively correlated assets to stocks.
However, you should be ready to rebalance your gold investment according to price performance of gold. If your position is to hold 5 or 10% of your investment portfolio in gold, you should sell some of the gold holdings when the demand is at its peak. Alternatively, when the price of gold is experiencing a bearish trend and it reaches its lowest value, that is the best time to purchase in order to maintain your 5 or 10 % investment in gold holdings.